The Necessity of Aggregative Approach and its limitations
Necessity of Aggregative Approach
It is true that micro approach for a long time dominated the economic thinking but that analysis centered on small atomistic units, is not only inadequate but misleading too. An individual unit reacts to a particular phenomenon or situation in a far different way than does a collection of units or an aggregate. During the recent decades, the pendulum of economic thinking has almost swung in favour of the aggregative approach. The necessity for aggregative approach has been recognized for the following reasons:
(i) Understanding of economic system: The need of macro-economic approach is felt because the aggregates like national income, aggregate output, national expenditure, gross savings and investment have assumed a strategic significance. These variables have provided a theoretical framework which facilities. understanding of the working of the complex economic system. All the economic models formulated with a view to investigate the functioning of an economy involve the aggregative variables. With whatever degree of sophistication the analysis is attempted, it is bound to be fallacious, if it is based upon the variables concerning only the individual units.
(ii) Accurate predictions: The aggregative variables like the stock of capital, population, general commercial and industrial activity and variations in the price level, enable the making of sufficiently accurate predictions about the future behavior pattern of these variables and their impact upon the changes occurring in the economic system. Such economic forecasting has got immense significance both from analytical and practical viewpoints.
(iii) Scientific investigation: The aggregative approach is significant because it is through the aggregates, or wholes that the proper investigation of micro-economic problems can be made possible. We cannot consider that the level and pattern of demand for a commodity by an individual is absolutely independent of the entire complex of the general demand and supply patterns of the commodities. There may be unemployment among the workers in a particular factory. This problem can be considered as absolutely micro one, if it is, in no way, related to the employment conditions in other firms, industries or the general unemployment situation. But it is not so in fact. The unemployment problem in an individual industrial unit can be evaluated only as a part of the general phenomenon prevailing in the economy. There has been an extensive use of the macro-economic tools in the micro-economic problems during the recent years. In contrast with the pre-Keynesian micro analysis, when the attempts were made to give generalization on the basis of the study of individual units, the disaggregative approach is now being extensively followed. The whole aggregate is split up into constituent sub-aggregates which are further split up into numerous units in order to study their behavior patterns.
Limitations of Macro-Economics
An excessive pre-occupation with macro approach poses serious difficulties for the practical application of its tools. But the analytical significance of this approach is beyond any doubt. It suffers from certain limitations alright but they do not invalidate the macro-economic technique itself. Almost all of these limitations flow from the tendency of treating aggregates as constituted by the individual micro fragments.
(i) Generalization from individual experience: The main limitation of the aggregative approach is that the logic and conclusion which may be true for the individuals or small units tend to be applied to the large aggregates. The generalizations derived from individuals and applied to the whole may be dangerous, irrelevant and misleading. From the point of view of an individual, the accumulation of saving may be considered as desirable but any attempt towards collective saving by the entire community can land it into depression. In the same way, an individual’s withdrawal of funds from the bank may be regarded as quite normal and necessary but the withdrawal of funds by all the depositors at the same time causes a serious banking crisis and threatens the collapse of banks. Boulding has very aptly remarked that “we must be on our guard against generalising from our individual experience; just because we ourselves can do it at the same time.”
(ii) Too much concentration on aggregates: Another difficulty or danger associated with macro-economic analysis is that there is an excessive thinking concentrated upon the aggregates which may be made up of non homogeneous constituents. Thus most of the attention is paid to the aggregates rather than the structure of the aggregates that may be quite meaningless or analytically inconsequential. Boulding has referred to certain aggregates which are entirely different in their structure and therefore, have varying analytical and practical significance. He states that a combination of 2 apples + 3 apples = 5 apples is a meaningful aggregates. 2 apples +3 oranges=5 fruit may be regarded as a fairly meaningful combination. In this case, the internal structure of aggregate is undoubtedly non-homogeneous, nevertheless the commodities can be grouped together as fruit and the combination is meaningful up to a degree. But there is no common denominator in a combination constituted by 2 apples + 3 sky scrapers and as such this aggregate, by no stretch of imagination, can be regarded as meaningful. Thus it is clear that preponderant thinking about the aggregates results in overlooking their internal composition and structure.
(iii) Difficulties in measuring aggregates: As indicated above the aggregate may often be composed of heterogenous elements which in addition to being meaningless are quite difficult to be handled for the purpose of analysis and formulation of economic policies. Various heterogenous quantities, it is asserted, can be expressed in terms of a common denominator of money and can, therefore, be conveniently aggregated. But the difficulty with money is that its value continuously changes. The aggregates of monetary values of all the items thus become immeasurable and non-comparable and such an aggregation becomes quite absurd.
(iv) Neglect of internal differences of aggregates: Macro-economic approach is deficient also because it has a tendency to overlook the differences within the aggregates. During a specific period the level of aggregates output in a country might have remained stable, but it is likely that the proportion of luxury goods to other commodities in the total output might have increased. The general price level in a country, over a certain period, might have gone up but the prices of industrial products might have gone down by a noticeable margin. Similarly, it may be possible that the national income in a country has gone up but the entrepreneurial class has become far better off than the wage-earners. An analysis of the aggregates, without taking into account the glaring differences which may exist within the aggregate, is incomplete and grossly defective.
(v) Baffling diversities: The aggregates which compose a system may not be analytically or practically significant or important. The general price level in a country, for instance, is composed of all types of price including the wholesale and retail prices. In addition to product prices, it is also significantly influenced by the factor-service prices like wages, rents. interests and profit and the prices of bonds, securities, mortgages etc. Some of these prices may move in one direction while the others may move in the opposite direction. The variation in some other category of prices may be quite erratic. There may also be significant differences in the rates of price variations in respect of different price categories. An aggregate based on so numerous diversities is absolutely unintelligible and cannot be distinguished from a hotch-potch or utter confusion.
It is evident from the above discussion that the limitations associated with macro-economics affect only its practical significance. There is no way to disprove the validity of the aggregative thinking.
